3. Profit maximization using total cost and total revenue curves Suppose Shen ru

Question

3. Profit maximization using total cost and total revenue curves Suppose Shen runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $25 per shirt. The following graph shows Shen's total cost curve. Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Shen produces. 200 T 175 Total Revenue 150 Total Cost 125 Profit ?100

Explanation / Answer

Shen's profit is maximized when he produces two shirts.When he does this,the marginal cost of the last shirt he produces is25$,which is greater than the price shen receives for each shirt he sells.The marginal cost of producing an additional shirt(that is, one more shirt than would maximize his profit) is 5$,which is greater than the price Shen receives for each shirt he sells.Therefore Shen's profit-maximizing quantity corresponds to the intersection of the total cost and economic profit curves.because Shen is a price taker,this last condition can also be written as MC=TR.

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